IASB Meeting 19-22 June 2007

Tuesday 19 June 2007 (afternoon only)

Financial Statement Presentation

The FASB staff joined the meeting by video link for this session.

Basket Transactions and Foreign Currency Translation

At their respective July 2006 Board meetings, the Boards agreed that the cohesiveness principle should be the governing principle in the financial statement presentation project. Under the cohesiveness principle, assets and liabilities are classified into a functional category (operating, investing, financing, and the like). The income and expense (including gains and losses) associated with those assets and liabilities are presented in the corresponding category in the statement of comprehensive income, and the cash flows associated with those assets and liabilities are presented in the corresponding category in the statement of cash flows.

However, it is not uncommon that a single transaction involves multiple assets (or a combination of assets and liabilities) that would be classified in more than one category under the proposed presentation format. These are referred to as 'basket transactions'.

The staff presented a memorandum discussing how basket transactions should be classified in the Statement of Cash Flows and in the Statement of Comprehensive Income.

Classification in the Statement of Cash Flows

Alternative A:

Require an entity to allocate cash flows related to all basket transactions to existing categories. This option was further split into:

• A-1 Allocate cash flows based on the relative carrying values of the assets and liabilities
• A-2 Allocate the cash flow to one category based on the function that is likely to be the predominant source of that cash flow
• A-3 Do not prescribe how to allocate cash flows to categories

Alternative B:

Require an entity to present cash flows related to all basket transactions in a new 'Acquisitions and Disposals' section.

Alternative C:

Require an entity to allocate cash flows related to certain basket transactions to existing categories and to present cash flows related to other basket transactions in a new 'Acquisitions and Disposals' section. Classification in the Statement of Comprehensive Income The memorandum discussed whether the income and expenses (including gains and losses) related to a basket transaction should be allocated to each category the assets or combination of assets and liabilities are classified in.

These issues were discussed at a FASB education session recently and a number of concerns were raised. The Board agreed with these concerns, which included:

• The grossing up of cash flows under Alternative A-1;
• An allocation based on relative fair values was not considered; and
• The allocation of cash flows was considered prior to the allocation of gains and losses rather than vice versa.

No decision was reached by the Board and it was agreed that the staff would rework the paper for future discussion based on the concerns raised at this meeting.

Presenting Information about the Cause of Change in Reported Amounts of Assets and Liabilities

The Board continued the discussion on applying the working principle that states: 'Financial statements should present information in a manner that helps a user understand what caused a change in reported amounts of individual assets and liabilities.'

Basis on which to disaggregate amounts recognised as income or expense

The disaggregation working principle states that line items should be disaggregated 'if that disaggregation enhances the usefulness of that information in predicting future cash flows'. The Boards' preliminary view in March was that amounts recognised as income or expense should be disaggregated based on the characteristics of persistence and measurement subjectivity. Persistence was defined as 'recurring and having predictive value'.

In their memo the staff concluded that it would be difficult to define and operate a disaggregation scheme that relies on the notion of 'measurement subjectivity'. Furthermore, it is nearly impossible to develop an operational definition of 'recurring'. The staff therefore recommended that disaggregation based on the predictive value of an amount recognised in income or expense would disaggregate information in a manner that enhances the usefulness of that information in predicting future cash flows.

The staff also proposed that both predictive and not predictive amounts recognised as income or expense be further disaggregated into (a) fair value adjustments and (b) all other changes, on the basis that disaggregation of amounts recognised as income or expense in this manner will help a user understand the cause of a change in reported amounts of assets and liabilities.

The Board discussed the issues and reached the following conclusions with regard to producing an initial discussion paper:

• The Board did not agree with disaggregating changes in assets and liabilities recognised as income and expense based on predictive value, as the concept of predictive value was not clear. In particular, the Board was unsure whether predictive value related to future cash flows or the future line item amount recognised (or both).
• The definition of 'fair value adjustments' needed to be clarified, such that it referred to all valuation adjustments.
• The staff should consider whether disaggregation based on (a) valuation adjustments and (b) other than valuation adjustments, would provide incremental information to the users given that, under the proposed presentation format, distinction between line items according to measurement basis is already required.
• If such a disaggregation scheme does provide incremental information, the Board believed that a 'through the eyes of management' accounting policy exclusion should be available. This would allow management the option of not disaggregating certain valuation adjustments that they considered integral to ordinary business activities (for example, inventory obsolescence, doubtful debt allowances), which could be retained in (b) other.

Methods of presenting information about changes in assets and liabilities

The board discussed the following three alternatives for presenting information about what caused a change in the reported amounts of assets and liabilities:

• Alternative A: Statement of Financial Position Reconciliation
• Alternative B: Statement of Comprehensive Income Matrix
• Alternative C: Reconciliation of the Statement of Cash Flows and Comprehensive Income

These formats were discussed in terms of three of the project's working principles related to this issue – that financial statements should present information in a manner that:

• Portrays a cohesive financial picture of an entity
• Helps a user understand what causes a change in reported amounts of individual assets and liabilities
• Helps a user assess the differences between cash transactions and accrual accounting.

Incorporating FCTA and Acquisitions and Disposals in a Statement of Financial Position Reconciliation

The board did not discuss this issue since the Statement of Financial Position Reconciliation (Alternative A above) was not the preferred method.

Leases

The FASB staff joined the meeting by video link for this session.

The Board discussed several issues regarding initial recognition and measurement of assets and liabilities under a simple non-cancellable lease arrangement with a fixed term, no options to extend or purchase and no residual value guarantees (the example).

Measurement of the lessee's liability to the lessor

Initial measurement

The Board discussed two approaches for the initial measurement of a lessee's liability for its obligation to make payments to the lessor:

• Present value calculated by discounting expected cash flows using the interest rate implicit in the lease, if this is practicable to determine; if not, the lessee's incremental borrowing rate is used.
• Fair value.

Subsequent measurement

The Board discussed three approaches for the subsequent measurement of a lessee's liability for its obligation to make payments to the lessor:

• Fair value
• Amortised cost using the effective interest method
• Amortised cost using the effective interest method with an option to fair value.

The Board unanimously agreed that the lessee's liability to the lessor is a financial liability. A majority of Board members pointed out that the lease project should not amend the current measurement requirements for financial liabilities and that therefore the lessee's liability to the lessor should be measured in accordance with IAS 39 Financial Instruments: Recognition and Measurement, that is, initial measurement at fair value and subsequent measurement at amortized cost using the effective interest method with an option to fair value.

Measurement of the lessee's right to use the asset

The Board considered three approaches to determining the initial and subsequent measurement of a lessee's right to use an asset:

Approach 1: Intangible Asset Approach

A lessee's right to use the asset is deemed similar in nature to an intangible asset acquired outside of a business combination. Thus, the initial and subsequent measurements should be consistent with the Boards' existing standards on accounting for intangible assets acquired outside of a business combination (IAS 38 Intangible Assets).

Approach 2: Nature of the Leased Item Approach

A lessee's right to use the asset is deemed similar in nature to the item the lessee obtains the use of via the lease contract. Thus, a lease of property, plant and equipment (PP&E) should have initial and subsequent measurements consistent with the Boards' existing standards on accounting for PP&E acquired outside of a business combination (IAS 16 Property, Plant and Equipment). Similarly, a lease of an intangible asset (if within the scope of the revised standard) should have initial and subsequent measurements consistent with the Boards' existing standards on accounting for intangible assets acquired outside of a business combination (IAS 38).

Approach 3: Separate Accounting Model Approach

Either a lessee's right to use the asset is deemed different in nature from both an intangible asset and the nature of the item being leased or another measurement approach would result in more decision-useful information and the incremental benefits of that approach exceed the incremental costs. In either case, a separate accounting model should be developed for the initial and subsequent measurement of a lessee's right to use asset. The separate measurement approach considered was to require that a lessee's right to use asset be measured at fair value, with changes in fair value recognized in profit or loss (earnings).

A majority of eight Board members was in favour of approach B and noted that the 'possession of the asset' should determine the accounting treatment and that the treatment for leased and owned (bought) assets should be the same. The supporters of approach A or C pointed out that the right to use an asset is different from the (physical) asset and that this right should be treated differently. Those in favour of C indicated that they would prefer 'a fair value model'.

One Board member suggested that lessor accounting should be considered simultaneously in order to avoid inconsistent accounting treatments on the lessee and lessor side. However, lessor accounting was not discussed further at this meeting.

The Board tentatively decided that all three approaches should be included in the discussion paper with mentioning B as the Board's preferred approach.

Initial recognition of assets and liabilities in lease contracts

The Board deliberated whether assets and liabilities arising in the example should be recognised upon contract signing or upon delivery/acceptance of the leased item.

In principle the Board agreed to recognise assets and liabilities upon delivery/acceptance of the leased item. However, it was noted that between contract signing and delivery of the leased item the lease contract is a forward contract. No decision was made regarding the treatment of the forward contract but the staff was directed to analyse for discussion at a future meeting situations in which there is a long period between signing and delivery.

Business Combinations II

The FASB staff joined the meeting by video conference.

The Board discussed several sweep issue identified while drafting the revised version of IFRS 3 Business Combinations and consequential amendments to other standard.

Accounting for the off-market value attributable to an operating lease in which the acquiree is a lessor

The issue was whether the off-market value attributable to an operating lease in which the acquiree is the lessor should be aggregated with or recognised separately from the underlying asset.

In February 2007 the IASB tentatively decided that an acquirer should measure and recognise an asset subject to an operating lease at its acquisition date fair value considering the terms of leases in place at the acquisition date. As such, a separate asset or liability would not be recognised if the lease is favourable or unfavourable. The FASB tentatively decided that the acquirer should measure and recognise an asset subject to an operating lease at its acquisition date fair value without considering the terms of leases in place at the acquisition date. If the terms of the lease are favourable (unfavourable) relative to market terms at the acquisition date, the acquirer would recognise an intangible asset (liability) separately from the asset subject to the operating lease.

The Boards discussed the issue again at the April 2007 joint meeting, and the IASB decided to converge with the FASB on this issue.

The staff identified a question regarding the application of the fair value model in periods after a business combination, particularly, how to determine the fair value of the investment property in periods after the combination.

The Board discussed the following options for measuring the fair value of an investment property in periods after the business combination.

Option 1:

Consistent with the provisions of IAS 40, measure the fair value of the investment property considering the cash flows from operating leases in place. However, in order to avoid double counting, this amount is adjusted by the current balance of the asset (liability) relating to the favourable (unfavourable) terms of an operating lease that was recognised separately at the acquisition date.

Option 2:

Measure the fair value of the investment property without considering the terms of any operating leases in place, even leases entered into after the acquisition.

Option 3:

Measure the fair value of the investment property without considering the terms of leases in place at the acquisition date. However, the entity does consider the terms of operating leases entered into or modified after the acquisition date.

The Board noted that all three options could result in a situation where identical assets appear dissimilar depending on how the asset was acquired. The Board acknowledged that IAS 40 Investment Property would have to be amended to avoid inconsistencies and that given the significance of such an amendment an exposure draft would be required.

To avoid amendments to IAS 40 the Board decided to reaffirm its February decision. It was noted that this decision does not affect goodwill but exclusively accounting under IAS 40.

Non-controlling interest (NCI)

The staff noted that the transition section of the pre-ballot draft of the NCI standard proposes to require that if the parent controls the subsidiary when the standard is applied, the parent would recast consolidated net income attributable to the parent to deduct any losses that were attributed to the parent because those losses exceeded the non-controlling interest in the equity capital of the subsidiary. Accordingly, those losses would be reattributed to the non-controlling interest.

The staff raised the concern that this decision may cause practice issues that will outweigh the benefits of comparability:

• The NCI transition decisions were premised on the view that the disclosure provisions should be applied retrospectively for comparability, but that transactions and amount recognized in the financial statements should not be changed. However, recasting for excess losses would require preparers to restate their earnings attributable to the controlling interest and, therefore, would affect earnings per share in prior periods.
• Additional guidance would be required about how far back earnings should be recasted.
• Additional guidance would be required on how to record that recast in the period of adoption, that is, whether it would be a charge to beginning retained earnings.

The Board unanimously agreed to the staff recommendation and decided that the amounts attributable to the parent and the non-controlling interest should not be changed if excess losses were previously attributed to the parent.

Replacement awards

The Board unanimously affirmed its decision that the accounting for replacement awards in the revised version of IFRS 3 should be limited to situations in which the acquirer is obligated to issue replacement awards.

Indemnification agreements

The Board unanimously decided:

• To clarify that an indemnification asset should only be recognised to the extent that it is collectible by adding the following sentence to paragraph 43 of the standard: 'The recognised indemnification asset shall be subject to management's assessment of the collectibility of that amount.'
• To clarify that the subsequent accounting for an indemnification asset should be the same as the acquisition date requirements; that is, that the acquirer, based on the specific terms of the agreement, would continue to recognise and measure the indemnification asset, using assumptions that are consistent with those used to measure the liability.

Wednesday 20 June 2007

Technical plan The IASB discussed the updated status of the Board's technical plan (detailed draft chart omitted from the observer notes).

The following items were noted:

Business Combinations II

The Board expects the final standard on Business Combinations to be issued in the third quarter of 2007, even though one Board member openly reiterated his fervent disagreement with the intended approach, followed by the results of Phase B of the Financial Statements presentation project. One Board member noted that due to the staffing priority assigned to the Business Combinations project, other important Board projects have languished. But he expressed the Board's intention to rectify this situation in the future, once the Business Combinations project is finalised. It was suggested to add the Annual Improvements project to the planning grid, which met with sympathy from most Board members.

Government grants

Several Board members indicated a desire to speed up the project on Government Grants, especially on emissions trading, in light of present activities in the United States. Prioritising the Income Taxes project after the finalisation of the Business Combination standard was also advocated and Board members advised that the language of a draft should be agreed with the FASB before a review by the IASB.

Liabilities

The IASB staff advised that they intend to push forward the Liabilities project and bring their conclusions to date to the Board at the July meeting. Regarding the Conceptual Framework project, the Board agreed this should be accelerated and acknowledged that there were open issues on the definitions, particularly on the definition of an asset, which needed to be resolved quickly. The staff promised to do further research, both on the asset definition and on the issue of stewardship. Both topics would be brought back to the Board at the July meeting.

Other

Some Board members were of the view that major progress needed to be made on the issues presently outstanding before taking any new issues on the agenda.

Post-employment Benefits

Benefit allocation for defined return promises

At its May 2007 meeting, the Board decided that benefit promises should be categorised as defined benefit, defined return, or defined contribution. The Board tentatively decided that a defined return promise had two components:

• (a) A contribution component that obliges the employer to make specified contributions. Those contributions may be funded or unfunded.
• (b) A promised return component that obliges the employer to provide a specified return based on the contribution component. The specified return may be an actual return on contributions or a hypothetical return on notional contributions.

It may be a fixed return, or it may refer to specified assets or an index.

The Board had also decided that the contribution component is measured as the sum of the accumulated unpaid contributions, while the promised return component is measured as the fair value of the promised return less any plan assets available to satisfy that liability. The staff paper recommended continuing to treat unvested benefits under a defined return promise as giving rise to a liability in phase I of the project. This question should only be addressed fundamentally in phase II.

The contribution component of the benefit promise would be allocated to periods of service in line with the benefit formula, even if the benefit formula specifies a materially higher level of contributions in later years. When asked by the Board, the staff clarified that this approach differs from the treatment in the present IAS 19 relating to 'backloaded' defined benefit promises, where the benefits are spread on a straight-line basis. Under the envisaged approach, where benefits are 'skewed' to later service periods, a liability would be recognised in line with the benefit formula. If, for example, the benefit formula stipulated that contribution would be made in twenty years time for 5 per cent of the employee's salary for each of the 20 years of service, a liability would only be recognised in year 20.

One Board member suggested that for defined return promises, the approach in IAS 37 would justify such an approach conceptually. The Board was in agreement that the 'straight-lining' approach relating to 'backloaded' defined benefit promises was an anti-abuse feature built into IAS 19 to prevent entities from not recognising (potentially material) defined benefit obligations in the early years. As such a feature was not part of the accounting for defined contribution plans, the existence or non-existence of a vesting period would lead to different results in the accounting for defined contribution and define benefit promises. The staff argued in favour of preserving the present accounting approach during phase I of the post-employment benefit project but perhaps change it in phase II. After a lengthy discussion, the chairman called for a hands-up vote. Only one Board member indicated disagreement.

Benefit allocation for defined benefit promises

IAS 19 requires that the benefit in defined benefit plans is attributed to periods of service in accordance with the benefit formula, unless the benefit formula would result in a materially higher level of benefit allocated to future years. In that case the benefit is allocated on a straight line basis. In the deliberations leading to IFRIC D9 Employee Benefits with a Promised Return on Contributions or Notional Contributions, the IFRIC considered whether expected increases in salary should be taken into account in determining whether a benefit formula expressed in terms of current salary allocates a materially higher level of benefit in later years. The staff paper recommended that the Board asked the IFRIC to develop a separate Interpretation on whether, for defined benefit promises, expected increases in salary should be taken into account in determining whether a benefit formula expressed in terms of current salary allocates a materially higher level of benefit in later years.

For defined return plans, as outlined above, the Board tentatively agreed not to straight-line backloaded plans but allocate benefits in accordance with the benefit formula. In the interest of sticking to the timeline of phase I, the Board asked whether or not this issue could be dealt with again by the IFRIC, but agreed not to proceed with this issue in phase I and to tentatively recommend to IFRIC not to deal with it either, despite noting the inconsistency between the approach taken for defined return promises and not proceeding to analyse a possible alternative accounting for backloaded for defined benefit promises. One Board member indicated he might be able to provide the staff with an example which could perhaps help solving the issue.

Measurement of the contribution liability

At the May meeting, the Board concluded that defined return promises are comprised of two components: a contribution requirement and a promised return on those contributions. The Board tentatively agreed that the measurement of the balance sheet liability in respect of each component would be as follows:

• (a) contribution requirement – the amount of any unpaid contributions
• (b) promised return – the fair value of the guaranteed return less any plan assets available to satisfy that liability

However, one Board member pointed out that measurement of the two components is inconsistent because it makes no allowance for the time value of money for the contribution requirement but makes an allowance for the time value of money for the promised return on those contributions.

The Board discussed and rejected the possibility of measuring the contribution requirement at fair value. But the staff thinks that discussion did not fully consider the effect of the time value of money on contributions that will not be paid for a long period of time, for example notional contributions to an unfunded plan. By contrast contributions in a defined contribution promise must generally be paid relatively soon after the period to which they relate. As a consequence, the staff had identified two options for taking the time value of money into account:

• (a) specify a discount rate to be used, or
• (b) require measurement of the contribution at fair value.

While the staff acknowledged that option (a) would avoid potentially lengthy debates on what the appropriate discount rate should be, it recommended to the Board measuring both the contribution requirement and the promised return at fair value.

While fair valuing the promised return component was generally accepted, as it constitutes a financial instrument, there was a lengthy discussion between the staff and the Board about the examples in the staff paper on the measurement of the contribution requirement. One Board member argued that requiring fair value measurement of the contribution requirement would lead to unnecessary complexity. Another Board Member remarked that he did not think taking the time value of money into account was really necessary. However, another Board member maintained that while fair valuing the contribution requirement was not required, as otherwise the Board would have to change paragraphs 52 and 53 of IAS 19, taking the time value of money into account could be achieved by discounting the contribution requirement by the discount rate required by IAS 19 for the measurement of defined benefit promises. No decisions were taken on this matter.

Inflation

Based on the proposed classification of employee benefit promises into defined contribution, defined return and defined benefit promises, the staff had been asked to clarify the classification of benefit promises linked to inflation. The staff recommended that:

• (a) Benefit promises with a promised return on contributions is are linked to wage inflation are classified as defined benefit.
• (b) Benefit promises with a promised return on contributions that is linked to assets or indices, eg. consumer price inflation, are classified as defined return.

The staff had drawn up the following illustrative example:

Plan A: For each year of service, the employee will receive a lump sum benefit equal to 5% of revalued salary. The revalued salary is the salary, in the year in which it is earned, increased in line with the increase in the national average earnings index over the period to retirement.

The staff argued that such a plan should be classified as defined benefit because:

• such a benefit promise is, in substance, a salary-related defined benefit promise, even if the salary to which it is related is national average earnings not the employee's actual salary.
• constituents have not raised problems in measuring benefit promises linked to wage inflation indices using the projected unit credit method in IAS 19.
• classifying these promises as defined return would result in a significant change in the accounting for many salary-related benefit promises. In particular, a defined return classification would require the employer to fair value a salary-related promise.

In the ensuing discussion, two Board members openly disagreed with the staff conclusions, arguing that such plans should be treated as defined return promises. The rest of the Board seemed to be of the same opinion. No decisions were taken on this matter.

Components of the defined return cost

The staff recommended that the change in the liability for the DR promise be disaggregated as follows:

• service cost being the initial recognition of the liability for the contributions payable for the year plus the initial fair value of the promised return on those contributions
• fair value gain/loss arising on the subsequent remeasurement of the liabilities.

1. market factors (such as risk-free interest rates),
2. cash receipts and payments,
3. changes in credit quality,
4. the passage of time,
5. demographic experience and
6. estimation methods or valuation models.

However, the staff argued that further disaggregation of the change in fair value of the liability into separate components would add unnecessary complexity without the benefit of providing additional decision-useful information, as had been shown by research during other projects. The Board by and large agreed with this conclusion although no formal vote was taken.

IFRIC – Approval of Interpretations:

The Board was asked to ratify two Interpretations approved by the IFRIC at its May meeting.

IFRIC X Customer Loyalty Programs (formerly D20)

The IFRIC had reached a consensus on how entities should apply IAS 18 Revenue if they grant loyalty award credits (air miles, points etc.) to customers who buy other goods or services and had voted to confirm that consensus at its May 2007 meeting. The consensus supports a 'separate component approach', because "In the IFRIC's view, loyalty awards are not costs that directly relate to the goods or services already delivered-rather, they are separate goods or services delivered at a later date."

This point was reiterated during the discussions. A number of changes had been made to the original draft in response to concerns voiced by constituents. One Board member asked the staff to clarify if the consensus meant that IFRIC had rejected a 'mixed approach', which the staff agreed it had. That member also asked for clarification on the methodology described in paragraph 8(b) of the draft interpretation. One Board member took issue with the examples used in IE 9 and 10 of the draft interpretation on a conceptual level.

In response to a request from another Board member, the staff clarified that in the example the transaction affected the current period (for points redeemed to date) and future periods (for points not yet redeemed). The staff was also asked (and agreed) to clarify that the interpretation does not apply to extended warranties.

One Board member remarked that, given the magnitude of the accounting changes involved in the implementation of this interpretation for a number of industries with substantial customer loyalty programmes, particularly for the airline industry, the transition period should be extended from the usual 90 days after ratification by the Board to 12 months. Moreover, it was argued that the transitional provisions should talk of earlier application being 'permitted' rather than 'encouraged'. Even though it is not normal Board procedure, 9 Board members agreed send the Interpretation back to IFRIC in order to change it, so as to 'permit' earlier application and extend the transition period to 12 months in a hands-up vote. The Board then proceeded to unanimously approve IFRIC X.

IFRIC X IAS 19 - The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction (formerly D19)

The IFRIC had reached a consensus that:

• An economic benefit, in the form of a refund of surplus or a reduction in future contributions, is available if the economic benefit will be realisable at some point during the life of the plan or will be realisable when the plan liabilities are finally settled.
• The economic benefit available as a refund shall be determined on the basis of any of three stated ways of getting a refund.
• If there is no minimum funding requirement, an entity shall determine the economic benefit available as a reduction in future contributions as the higher of
  • the surplus in the plan and
  • the present value of the future service cost to the entity, that is, excluding any part of the future cost that will be borne by employees, for each year over the shorter of the expected life of the plan and the expected life of the entity.
• If there is a minimum funding requirement for contributions relating to the future accrual of benefits, an entity shall determine the economic benefit available as a reduction in future contributions as the present value of:
  • the estimated future service cost in each year in accordance with c) less
  • the estimated minimum funding contributions required in respect of the future accrual of benefits in that year.
• If the limit on a defined benefit asset makes an obligation under a minimum funding requirement onerous, the entity shall recognise a liability when the obligation arises.

The IFRIC had made a number of clarifications since issuing the first draft D19, including a clarification of when an entity controls an asset arising from the availability of a refund and to the requirements relating to assumptions underlying the measurement of a reduction in future contributions.

While some Board members complained about the length of the document, the Board unanimously agreed to issue it as a final Interpretation. The staff pointed out that some of the length was due to the insertion of practical examples. However, the staff was of the opinion that the interpretation would be unintelligible to without these examples. Some constituents had, moreover, expressly asked for them to be kept in the interpretation.

Proposed amendments to IAS 39 Financial Instruments: Recognition and Measurement –

Identification of exposures qualifying for hedge accounting

The Board discussed a first pre-ballot draft of a proposed amendment to IAS 39. (The pre-ballot draft was omitted from the observer notes.)

The proposed amendments specify:

• the risks that qualify for designation as hedged risks when an entity hedges its exposure to a financial asset or financial liability
• when an entity may designate a portion of the cash flows of a financial instrument as a hedged item.

With regard to the first issue it appeared from the discussion that the following risks will be specified in the amendment:

• Market interest rate risk
• Foreign currency risk
• Credit risk
• Prepayment risk
• The risks associated with the cash flows of a financial instrument that are contractually specified and are independent from the other cash flows of the same financial instrument.

With regard to the second issue the amendment appears to identify the following "other portions" as eligible for designation:

• The risk-free or LIBOR portion of an interest bearing financial instrument;
• The prepayment portion of an interest bearing financial instrument;
• The remaining portion of an interest bearing financial instrument once the interest rate or prepayment risk portion has been excluded (labelled as a 'credit portion').

The Board clarified that, while it was moving in the direction of the FASB, it was not going for full convergence, as the

IASB proposals provide more restrictions on hedged portions.

No Board member indicated to dissent from issuing the current version of the pre-ballot draft.

Conceptual Framework Phase A – Objectives and Qualitative Characteristics

Redeliberations: The objective of financial reporting

Following the analysis of comments received related to the Discussion Paper (DP) Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information, the staff presented issues requiring decisions by the Board.

Scope of financial reporting

The following issues were raised by respondents:

• Many respondents suggested that the framework should be limited to financial statements until the Boards have determined what constitutes financial reporting. It was also noted that, in many jurisdictions, there are other bodies charged with responsibility for regulating the many types of reports included in the DP.
• Some constituents suggested that the Boards define the components of financial reporting, such as business reporting, corporate governance reporting, and financial statements in Phase A of the project.

Some Board members acknowledged that a 'preliminary definition' of the boundaries of financial reporting would be helpful at this stage. They raised the concern that 'reporting' is a very broad term and could be misleading if not defined at all; for example, the term could suggest that management reporting is included.

In reply one Board member noted that the term 'external' in general purpose external financial reporting (GPEFR) already narrows the scope of financial reporting. Other Board members stated that defining the boundaries of financial reporting is not an easy exercise and therefore would require significant resources.

The staff noted that in the education sessions the FASB has worked out a general description of what financial reporting means.

Finally, the Board unanimously affirmed to focus in phase A on financial reporting rather than only financial statements and to address in phase E the scope of financial reporting. There seemed to be a consensus to include a general description of financial reporting in the phase A exposure draft.

Entity perspective vs. proprietary perspective

Some respondents stated that the Boards appear to have decided that the entity theory of the reporting entity is superior to the proprietary theory without deliberating the relevant issues for that matter. In addition, it was noted that a proprietary approach would be more consistent with the Boards' chosen focus on a primary user group (present and potential investors and creditors).

The Board was of the view that the responses mainly related to the definition of the reporting entity rather than who is reporting.

The Board unanimously agreed that phase A of the project should merely explain that an entity is subject of GPEFR, i.e. that an entity has substance of its own. All issues regarding the reporting entity should be addressed in phase D.

The primary user group

The staff noted that there was considerable diversity among respondents as to how to define the primary user group. Among those who disagreed with the Boards' identified primary user group, the majority preferred a focus on present common shareholders.

The Board acknowledged that there is information that is relevant for current shareholders only but decided not to change the composition of the primary user group and to retain the guidance in the DP.

Based on the comments received the staff suggested to change the terminology by using the term 'capital providers' to represent both investors and creditors, as this term may be less ambiguous across the many jurisdictions of the Boards' constituencies.

The Board discussed the following definitions for the primary user group:

• (a) Present and potential investors and creditors (i.e. the term currently used)
• (b) Present and potential capital providers
• (c) Present and potential resource providers

The Board had a thorough discussion and mixed views were expressed. It was noted that all three definitions could be misleading without additional explanation, for example the following statements were made:

• The term resource is very broad and also employees could be considered to be resource providers
• The term capital is not defined and could also relate to assets.
• The term capital might not work for some non-profit entities
• The term creditors is often associated with suppliers (short-term creditors)

Seven Board members were in favour of definition a), six supported definition b) and one Board member preferred definition (c). Finally, the Board decided not to change the terminology.

Government and regulatory bodies as potential user

Three respondents stated governments and regulatory bodies should not be identified as potential user groups. They argued that governments and regulatory bodies are not a user group of general purpose financial reporting because they typically can dictate the information and presentation of that information that best suits their needs.

The Board acknowledged that the argument may be valid for certain authorities such as tax authorities but that governments and regulatory bodies also play other roles in addition to direct regulation.

Therefore, the Board unanimously decided to continue to include governments and regulatory bodies as potential users.

Redeliberations: Qualitative characteristics of decision-useful financial reporting information - sweep issue

At the April 2007 meeting the question whether timeliness should be characterised as a constraint on financial reporting or a qualitative characteristic remained unresolved.

The Board reaffirmed its tentative decision that timeliness should not be characterised as a constraint on financial reporting and agreed to describe timeliness as a separate enhancing qualitative characteristic. The Board noted that timeliness actually enhances the decision-usefulness of information that is relevant and faithfully represented whereas the constraints on financial reporting (materiality and benefit and costs) do not.

Thursday 21 June 2007

Amendments to IFRS 1 First-time Adoption of IFRSs–Cost of an Investment in a Subsidiary

Comment Letter Analysis

The staff introduced their analysis of comments received on the IASB's Exposure Draft of Proposed Amendments to IFRS 1 First-time Adoption of IFRSs – Cost of an Investment in a Subsidiary (ED). The analysis is available in the Observer Notes Section of the IASB's website (Agenda Paper 10A).

The staff was merely asking for the Board's initial views on the comments received and accordingly no decisions were made at this meeting.

Deemed cost

This exposure draft proposes to allow as deemed cost the carrying amount of the net assets calculated under IFRSs of the subsidiary or its fair value.

The option to use fair value was widely supported.

Regarding the option of using carrying amounts, many respondents preferred deemed cost to be the carrying amount of the net assets calculated in accordance with previous national GAAP either instead of or in conjunction with the relief offered in the ED. The main reason for opposing was that the approach in the ED does not allow for the inclusion of goodwill in the carrying amount of the net assets because to do so would be tantamount to recognising internally generated goodwill. The respondents raised the concern that this may result in a write down of the investment in subsidiaries on transition to IFRSs. This write-down may present such an adverse taxation and/or legal scenario – particularly in its effect on profits available for dividend distributions – that many entities will continue to opt out of adopting IFRSs for their separate financial statements.

The following alternative approaches to determine deemed cost were proposed by constituents:

• (a) Cost under previous national GAAP
• (b) The higher of the previous GAAP carrying amount of the investment and the net asset value (as determined under the provisions of the ED)
• (c) The net asset value of the subsidiary (as determined under IFRSs) with historical goodwill included
• (d) The net asset value of the subsidiary (including goodwill) included in the consolidated financial statements

One Board member acknowledged that the 'goodwill issue' is a valid point that should be considered further. However, the majority of Board members seemed not to support any of the alternative approaches. Particularly with regard to methods (b) and (c) one Board member noted that the reason for developing the relief was difficulties in determining cost. In his view the alternative approaches indicate that entities are in the position to determine cost and therefore these entities would not need the relief. There appeared to be general consent for this view.

Determining pre-acquisition profits

This ED proposes a simplified approach to determining the pre-acquisition accumulated profits of a subsidiary for the purpose of the cost method in IAS 27.

The staff expressed the view that many respondents consider the reason for the problem to be a fundamental flaw of IAS 27 (that is, the cost method) rather than to be a first-time adoption issue. These respondents suggest that IAS 27 be amended to permit dividends from subsidiaries to be treated as investment income, subject to an impairment test of the value of the subsidiary in the parent's accounts and consideration of whether the dividend is, in substance, a return of capital invested.

The Board accepted a proposal of senior staff to investigate whether consequential amendments to IAS 27 would be a useful approach. The staff was asked to prepare a paper for discussion at a future meeting.

Joint Ventures

The Board discussed several sweep issues identified in drafting the exposure draft of proposed amendments to IAS 31 Interests in Joint Ventures (ED).

Disclosures in IAS 31

The staff proposed to require similar disclosure requirements of interests in joint ventures in IAS 31 as would be required for associates in IAS 28 Investments in Associates given that the ED requires an entity to account for both joint ventures and associates by using the equity method.

The proposed disclosure requirements in the ED would read as follows (the reference to disclosure requirements of the current standards was added in brackets):

"41 A venturer shall make the following disclosures relating to interests in joint ventures:

(a) a list and description of interests in significant joint ventures and the proportion of ownership interest held; [carried forward from IAS 31 paragraph 56. Also required for interests in joint ventures measured at fair value in accordance with IAS 39]
(b) summarised financial information of joint ventures, including the venturer's interest in the amount of each of current assets, non-current assets, current liabilities, non-current liabilities, revenues and profit or loss. This disclosure is presented in total for all joint ventures; [carried forward from IAS 31 paragraph 56 with some changes]
(c) the reporting date of the financial statements of a joint venture, when such financial statements are used in applying the equity method and are as of a reporting date or for a period that is different from that of the venturer, and the reason for using a different reporting date or different period; [new disclosure consistent with IAS 28 paragraph 37]
(d) the nature and extent of any significant restrictions (for instance, resulting from borrowing arrangements or regulatory requirements) on the ability of joint ventures to transfer funds to the venturer in the form of cash dividends, or repayment of loans or advances; [new disclosure consistent with IAS 28 paragraph 37. Also required for interests in joint ventures measured at fair value in accordance with IAS 39]
(e) the unrecognised share of losses of a joint venture, both for the period and cumulatively, if a venturer has discontinued recognition of its share of losses of a joint venture. [new disclosure consistent with IAS 28 paragraph 37]

42 A venturer shall classify interests in joint ventures accounted for using the equity method as non-current assets. The venturer shall disclose separately its share of the profit or loss of such joint ventures, and the carrying amount of those interests. The venturer shall also disclose separately its share of any discontinued operations of such joint ventures. [new disclosure consistent with IAS 28 paragraph 38]

43 A venturer shall recognise directly in equity its share of changes recognised directly in the joint venture's equity. The venturer shall disclose its share of those changes in the statement of changes in equity as required by IAS 1 Presentation of Financial Statements. [new disclosure consistent with IAS 28 paragraph 39 - note: the wording of this disclosure will change when the amendments to IAS 1 are final]

44 A party shall disclose the aggregate amount of the following commitments separately from other commitments:

(a) any capital commitments of the party relating to its interests in joint arrangements; and
(b) its share of capital commitments incurred jointly with other parties. [carried forward from IAS 31 paragraph 55(a); paragraph 55(b) deleted. Also required for interests in joint arrangements measured at fair value in accordance with IAS 39]

45 In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, an entity shall disclose:

(a) any contingent liabilities incurred relating to its interests in joint arrangements; and
(b) its share of contingent liabilities incurred jointly with other parties. [carried forward from IAS 31 paragraph 54(a); paragraph 54(b) and (c) deleted because the disclosure requirements of paragraph 54(b) and (c) are incorporated within the disclosure requirements of paragraph 54(a) reproduced here as paragraph 45(a)]"

The Board made the following decisions:

• Paragraphs 41(b) to 41(d), 44. and 45 above were unanimously agreed without further discussion.
• The Board also agreed to paragraph 41(a) above and noted that a similar disclosure should be required in IAS 28. It was decided to propose a consequential amendment in the ED and explicitly ask for comments.
• In connection with paragraph 41(e) above the Board had a lengthy discussion on the accounting treatment of losses occurring after the investment has been written down to zero. Two Board member were severely concerned about the fact that unrecognised losses can arise under the equity method and one of these Board members indicated to dissent to the ED for that reason. Finally, the Board agreed that all unrecognised losses should be disclosed and agreed to paragraph 41(e) above.
• With regard to paragraph 42 above the Board questioned whether the statement that a venturer shall classify interests in joint ventures accounted for using the equity method as non-current assets would be correct in all circumstances. The issue was pushed back to the staff.
• Paragraph 43 above was not discussed.
• In addition, the Board decided to delete paragraphs 37(h) and 37(i) of IAS 28 as consequential amendments.

Transitional provisions

The Board decided to require retrospective application of the proposed amendments. It was noted that the information required to account for interests in joint ventures using the equity method should be the same as that required to apply proportionate consolidation.

Incorporation of SIC 13 Jointly Controlled Entities – Non-Monetary Contributions by Venturers

Subject to some editorial amendments the Board agreed to incorporate the consensus of SIC 13 by adding the following paragraph to the ED:

"When a venturer contributes a non-monetary asset to a joint venture in exchange for an equity interest in the joint venture, a venturer recognises in its financial statements a gain or loss resulting from the transaction only to the extent of unrelated investors' interests in the joint venture except when:

• (a) the venturer retains control of the contributed asset;
• (b) the gain or loss resulting from the transaction cannot be measured reliably; or
• (c) the transaction lacks commercial substance, as described in IAS 16 Property, Plant and Equipment.

If (a), (b), or (c) applies, a venturer offsets the unrecognised gain or loss against its investment in the joint venture."

Conclusion

One Board member indicated an intention to dissent to the Exposure Draft for the reason that the application of the equity method can result in unrecognised losses. One Board member was indecisive and stated that he might dissent for the same reason.

Annual Improvements

IAS 38 – Advertising and Promotional Activities

In May 2007, the Board agreed a proposal to amend paragraph 68-70 of IAS 38 such that:

• IAS 38.69 would be amended to state that expenditure on advertising and promotional activities would be recognised as an expense when those activities are rendered to the entity; and
• IAS 38.70 would be clarified to state that, to the extent that there is a prepayment for such services, an entity is not precluded from recognising a prepayment asset between the time the payment is made and the time the service is rendered to the entity.

The draft changes submitted to the Board (omitted from the observer note) generated considerable debate. It appeared that it was unclear when the advertising and promotional activities should be considered as 'rendered' and therefore recognised as expenditures in profit or loss. Is it when they are delivered to the entity or to the targeted audience?

The Board agreed that the activities are considered rendered when they are delivered to the entity. Thus, if an entity pays in advance for the preparation and broadcast of a television commercial, the costs associated with the preparation of the commercial should be expensed on completion and delivery of the commercial to the entity. On the other hand, the air time would only be expensed when the television commercial is aired.

IAS 16 – Sale of assets held for rental

The IFRIC was asked to provide guidance on the accounting for sales of assets held for rental. The issues are whether the sales should be presented gross (revenue and costs of sales) or net (gain or loss) in the income statement and how they should be classified in the balance sheet during the renting and held for sale period (if any).

At its May 2007 meeting, the IFRIC noted that IAS 16 paragraph 68 states that gains arising from derecognition of an item of PP&E should not be classified as revenue. As IAS 16 is clear that disposal of an item of PP&E should be reported net in the income statement, the IFRIC believed that this issue would be better addressed by amending the Standards rather than by means of an Interpretation and therefore decided not to take this issue on its agenda but to draw it to the attention of the Board.

Based on the discussion at the IFRIC meetings, the staff presented to the Board two possible alternative views:

• View 1: When sales of assets held for rental arise in the course of an entity's ordinary activities and recur on a regular basis, the entity should report gross revenue from sales;
• View 2: Revenue from the sales of these assets should be reported net. No exception should be made to IAS 16.

Two possible accounting treatments would reflect that gross presentation of revenue. Under View 1A the asset is initially classified as non-current PP&E and when the asset ceases to be rented either it is immediately sold or held for sale and transferred to inventories. Under View 1B the asset is initially classified as current inventories.

The Board agreed with View 1A but suggested two editorial comments to be made. Firstly, they wanted to clarify that it is the carrying amount of the PP&E that should be transferred to inventory once the asset ceased to be rented and secondly that 'ordinary activities' should be replaced by 'routine activities'.

IAS 1 – Current or non-current presentation of derivatives that are not designated as hedging instruments

The IFRIC raised to the attention of the Board an inconsistent guidance in IAS 1 regarding the current/non-current classification of derivatives. The guidance included in paragraph 62 of IAS 1 might be read by some as implying that financial liabilities that are classified as held for trading in accordance with IAS 39 are required to be presented as current.

The Board decided to address this inconsistency by amending the examples of current liabilities in paragraph 62 of IAS 1 as follows: "Examples are financial liabilities held primarily for the purpose of being traded classified as held for trading in accordance with IAS 39, bank overdrafts," The Board also highlighted that this was not only relevant for derivatives that are not designated as hedging instruments but for all derivatives.

IAS 28 – Impairment of investment in associate

At the May 2007 meeting, the Board decided that any impairment recognised by an investor against an associate, when it applies the additional impairment test required by IAS 28, should not be allocated to goodwill and other individual underlying assets of the associate. Furthermore there should be no restrictions on the reversal of the impairment charge to the extent that the recoverable amount subsequently increases. The Board asked the staff to consider whether the impairment of the associate should be performed by applying the guidance in IAS 36 or IAS 39

At this meeting, the Board decided that the guidance in IAS 28 should clarify that the impairment test in IAS 28 refers to IAS 36 impairment testing and, for that purpose, that the investment in an associate is treated as a single asset for impairment testing. The Board also decided to specify than any additional impairment loss is not allocated against goodwill or other assets included in the investment balance. Accordingly reversals of the additional impairment should be recognised as an adjustment to the investment in the associate to the extent that the recoverable amount increases.

IAS 39 – Reclassifying derivatives on cessation or commencement of hedge accounting and reclassifying portfolio financial instruments

The staff identified an apparent inconsistency in the guidance of Paragraph 9 and 50 of IAS 39. It relates to the reclassification of certain financial instruments into or out of the category of financial asset or financial liability at fair value through profit or loss in certain circumstances. These are:

1. Reclassification of derivative that no longer qualifies as a hedging instrument in accordance with IAS 39 or vice versa; and
2. Reclassification of financial instruments that, after initial recognition, become, or cease to be, part of a portfolio of identified instruments that are managed together and for which there is evidence of a recent pattern of short-term profit-taking.

After a lengthy debate, the Board did not manage to conclude on this issue. Thus, it was decided to bring this issue back at a subsequent meeting.

IAS 39 – Applicable effective interest rate on cessation of fair value hedge accounting

The staff identified an apparent inconsistency in the guidance in IAS 39. It relates to whether the revised or the original effective interest rate of a debt instrument should be applied in the remeasurement of the instrument's carrying amount on the cessation of fair value hedge accounting.

The Board decided to address this inconsistency by clarifying that the remeasurement of an instrument in accordance with AG8 is based on the revised effective interest rate calculated in accordance with paragraph 92 of IAS 39 where applicable rather than the original effective interest rate.

IAS 39 – Treating prepayment penalties as closely related embedded derivatives

The staff identified an apparent inconsistency in the guidance in IAS 39. It relates to penalties for early repayment (that is, prepayment) of loans and whether these are classified as closely related to the loan. The Board decided to address this inconsistency by amending paragraph AG30(g) of the application guidance of IAS 39 to make an exception to the example of embedded derivatives that are not closely related to the underlying. This exception is in respect of prepayment penalties that no more than compensate the lender for the loss of interest.

IAS 39 and IAS 20 – Accounting for nil or low interest loans received from a government

The staff identified an apparent inconsistency in the guidance in IAS 20 and IAS 39. It relates to the accounting for nil or low interest loan received from a government. IAS 20 states that no interest should be imputed for such a loan, whereas IAS 39 requires that all nil or low interest loans are recognised at fair value, thus imputing interest to the loan.

The Board decided to address this inconsistency by requiring below market rate government loans to be recognised and measured in accordance with IAS 39. They agreed to have the proposed draft amended accordingly as they believe that the term nil or low interest rate loans was not specific enough. As a consequence, the benefit of the government loan is calculated by the imputation of interest in accordance with IAS 39.

IAS 39 and IFRS 4 – Accounting by holders of financial guarantee contracts

The staff has been notified of an apparent ambiguity in the scope of IAS 39. It relates to the accounting by the holder of a financial guarantee contract. Scope paragraph 2(e) of IAS 39 implicitly excludes financial guarantee contracts held by the entity because of the general exclusion of insurance contracts from IAS 39 other than those issued by the entity that meet the definition of a financial guarantee contract. The implicit exclusion by paragraph 2(e) contrasts with the explicit exclusion of such contracts by the introductory paragraph IN6 of IAS 39.

The staff noted that the clarity of the standard would be improved by making a link between the introductory paragraph IN6 and paragraph 2(e) of IAS 39. This will be achieved by including an additional sentence in the introduction of IAS 39. Note that this issue is considered to be most appropriately resolved as an editorial change. The Board unanimously agreed with the staff proposal.

IAS 39 and IAS 18 – Costs of originating a loan

The staff has been notified of an apparent inconsistency in the guidance of IAS 18 and IAS 39. It relates to the accounting for transaction costs when originating a loan. Paragraph 43 of IAS 39 requires that financial assets are recognised initially at fair value plus, in the case of financial asset not at fair value through profit and loss, transaction costs. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. Paragraph A4(a)(i) of the Appendix to IAS 18 states that fees that are an integral part of generating an ongoing involvement with a financial instrument are deferred, together with 'the related costs'. This would seem to permit more costs to be deferred than IAS 39 because there is no requirement for these costs to be incremental.

The staff recommended that the Appendix to IAS 18 be amended as an editorial change in order to clarify that 'origination fees' together with related transaction costs (as defined in IAS 39), are deferred and recognised as an adjustment to the effective interest rate.

The Board disagreed with the staff recommendation to have this corrected as an editorial change considering its implication and the widespread use of the Appendix to IAS 18 in practice. The Board proposed to have this issue exposed for comments instead.

IAS 41 – Discount rate for fair value calculations

The staff identified an apparent inconsistency in the guidance in paragraph 20 of IAS 41. It relates to the guidance on which discount rate should be used to calculate the fair value of the biological assets when using expected net cash flow as the basis for the calculation. Fair value is generally viewed as a post-tax concept and so the discount rate used. However, IAS 41 currently requires the use of a pre-tax discount rate to calculate fair value.

The staff proposed to address this inconsistency by amending IAS 41 to require the use of a post-tax discount rate when calculating fair value. The Board disagreed as they consider this to be more a fair value measurement issue and, therefore, requiring a post-tax discount rate would not solve the problem. The Board proposed to replace the 'pre-tax discount rate' by the 'rate applicable by the market participant' leaving it to the entity to determine which discount rate to be used.

IAS 41 – Replanting obligations

The staff identified an apparent practical issue that arises when an entity that has biological assets also has a legal obligation to replant such assets after harvest. The issue relates to the interaction of the requirement of IAS 37 and IAS 41. Paragraph 22 of IAS 41 requires that the calculation of fair value is not reduced by future replanting costs. A provision for replanting and the associated costs is recognised at the point of harvest where there is a legal obligation to replant in accordance with IAS 37.

After a lengthy debate, the Board did not reach a conclusion on this issue. Different views were expressed, and therefore the Board agreed to iscuss it again at the next meeting.

IAS 41 – Examples of agricultural produce

The staff identified that one of the examples of agricultural produce is an example of produce that has been processed rather than an example of unprocessed produce.

The Board decided to address this issue by amending this example by replacing 'logs' by 'felled trees' as agricultural produce of 'trees in a plantation forest'.

Friday 22 June 2007

Extractive Activities Research Project

The Board held two educational sessions on the extractive activities project. The first was a report from the project team; the second was an interactive session at which analysts who follow the extractive industries participated.

Project team report: convergence of definitions

The Project team provided a report Board on the progress of a review that is considering the potential for increased alignment between the minerals sector's definitions of reserves and resources and the petroleum sector's definitions of 'reserves' and 'resources'. The review is being undertaken by the SPE/CRIRSCO convergence team – which is an industry working group comprising members of the Society of Petroleum Engineers Oil and Gas Reserves Committee (SPE OGRC) and the Committee for Mineral Reserves International Reporting Standards (CRIRSCO). In an oral presentation, a representative of the SPE OGRC noted that what the two groups were trying to achieve was convergence of the assessment methodologies. How those methodologies were described might not be converged (for a variety of historical and operational reasons), but the definitions and descriptions used would be mapped to each other, so that confusion was minimised.

A Board member noted that this effort was critical to the IASB's research project. The reconciliation of the definitions of reserves and resources was a necessary step that was helpful to the Board as they explore whether it wants to use the resulting data as the basis for financial reporting.

Board members questioned and discussed various aspects of the definitions, especially those aspects of the definitions that might trigger accounting events. Several expressed appreciation for the efforts of the two sectors to reconcile the definitions and thought that they might be useful as the project team continues its work.

The Chairman thanked the CRIRSCO and SPE teams for their efforts and commended the progress that had already been made. They were very helpful to the IASB as they educated themselves in this area and it was evident from the interest expressed in other areas, such as the United Nations Framework Classification project, that the work effort had relevance beyond the work of the IASB.

User survey discussion

At the second educational session, the project team presented and discussed the findings of a user survey that they had conducted to develop a better understanding of the information needs of users involved in analysing minerals and petroleum entities. They were joined by four UK-based analysts from Cazenove, Fidelity Investments, and UBS.

The project team had conducted interviews with 34 analysts, including buy-side, sell-side, venture capital, lenders, and debt rating agencies. These analysts were based in a variety of jurisdictions. The core findings from the user survey were:

• the financial statements and note disclosures provide some information that is necessary for users to make an informed investment decision in relation to a minerals or oil & gas company – primarily information related to cash flow and current period expenditures – but the information provided in financial statements and note disclosures alone is not sufficient to meet the needs of analysts and much information is sourced elsewhere;
• there is very limited interest in placing a valuation of reserves and resources (at current value or fair value) on the balance sheet;
• there is limited interest in disclosing a valuation of reserves and resources (at current value or fair value);
• measuring reserve and resource assets on the balance sheet according to a historical cost measurement model (for example, successful efforts, full cost, area of interest) does not generate much useful information;
• analysts generally would prefer more, and/or improved, disclosure of key valuation inputs so that those inputs could be incorporated into their own valuation models; and
• directors' sign off was generally identified as the preferred assurance or responsibility process that could be applied to the reporting of reserve information.

Board members and the analyst guests discussed various aspects of the survey results. Much of the discussion focussed on the petroleum sector. It was noted some of the disclosures required under FAS 69 and related SEC requirements did provide useful information. These disclosures had seen marked improvements in recent years.

In addition, companies provide additional materials; however those materials although similar are not prepared on a consistent basis.

The analysts present expressed mixed views about the benefits of assigning a value to reserve and resources on the balance sheet. Concerns about subjectivity and assigning 'too much credibility' to a number fraught with estimation error underlay these views. A disaggregation of inputs would assist analysts to make comparisons across companies in the sector. Board members noted that such concerns could also be made about other items for which a number is currently reported on the balance sheet. Issues similar to those in the extractive industry arose in other areas of speculative development, for example pharmaceuticals.

Board members asked, if current measures were not thought useful, what could be done to make historical cost-based financial information more useful. Were there opportunities for the Board to require more useful information; information that would be helpful in assessing costs and future cash flows. In particular, would it be helpful to concentrate on the information currently provided in some jurisdictions for 'upstream' and 'junior' activities-such as those in the US for development stage entities-where information about certain costs that are expensed are still captured in some way.

Analysts and Board members noted the potential cross-over between information in the financial statements and footnotes and information discussed in the management commentary. Much of the more subjective information reviewed by the Chief Operating Decision Maker was as important as that captured in the financial statements.

Without getting to industry-specific matters, there was still an opportunity to require discussion of the types of data related to income generation, operational performance, etc.

The project team asked the Board for their views on possible approaches to financial reporting for inclusion in the Discussion Paper. The staff proposed a current value model and a historical cost model with enhanced decision-useful disclosures.

A Board member noted that there were cross-cutting issues, especially the 'unit of account' issue, before any decision can be taken on what the financial reporting should be. After further discussion, the Board agreed that the Project team should continue to develop the two proposed models.

Financial Instruments Puttable at Fair Value and Obligations Arising on Liquidation – Re-deliberations of Exposure Draft: sweep issues.

The Board held a very brief discussion with the staff on the project. As a result of discussions between staff and individual Board members, it was apparent to the staff that additional analysis was necessary before the staff was in a position to bring a revised proposal to the Board. A brief discussion followed that summarised some of the challenges to the IAS 39 definition of equity that the staff is analysing. The staff expects to present its analysis at the July 2007 meeting.

Farewell to Colleagues and Friends

The Chairman noted that the terms of three founder members of the IASB were coming to an end and that they were ineligible for reappointment. He highlighted the individual contributions of each of Hans-Georg Bruns, Tony Cope and Tricia O'Malley. Ms O'Malley remains at the IASB as a member of the senior staff in the role as the IFRIC co-ordinator. It was apparent that Messrs Bruns and Cope have not escaped entirely either, as both have agreed to speak from time to time on behalf of the IASB.

This summary is based on notes taken by observers at the IASB meeting and should not be regarded as an official or final summary.